RIA assets seen as key to Schwab, TD Ameritrade

Registered investment advisers, listen up. Your custodian needs you—more than ever. Just look at this week’s earnings reports from Charles Schwab Corp. and TD Ameritrade Holding Corp. Asset growth, fueled in part by the RIA custody businesses of both firms, was a bright spot, while trading revenue took a big hit. Both firms reported higher asset-based revenue as they brought on more financial advisors as well as retail investors in the three months ended June 30. For strategic reasons, both firms want assets, including those from their institutional RIA businesses, to account for a greater share of the balance sheet.

Trading revenue, like the markets, is often volatile. Daily average retail trading was down 12 percent from May to June at TDA and 8 percent at Schwab, said Michael Tarkan, an analyst who follows both companies for FBR Capital Markets. Trading generally slows down during the summer but this year has been exacerbated by issues such as the wrangling in Washington over raising the debt ceiling to forestall a national default, and the ongoing European debt crisis. Of the two companies, TDA feels the volatility more, Tarkan says; 45 percent of its revenue comes from trading, while at Schwab the share is just 20 percent.

Asset gathering is key to custodians, since the fees are less subject to the vagaries of the stock market and provide steadier income. Schwab is the bigger player of the two companies. (Privately-held Fidelity Investments doesn’t report quarterly financial results; publicly-held BNY Mellon this week didn’t break out the results of its Pershing subsidiary, which also custodies assets for and provides support services to the RIA advisor industry.) Client assets at Schwab Advisor Services hit $697.8 billion, up 17 percent year over year, while net new assets reached $10.6 billion, up 4 percent. (Part of the net new asset figure was boosted by $1.5 billion through the acquisition of Windhaven Investment Management in the fourth quarter.)

TD Ameritrade’s institutional arm reeled in net new assets of $7.9 billion last quarter, down from $11.5 billion in the preceding quarter and $8.9 billion a year earlier. But those numbers don’t represent an apples-to-apples comparisons with Schwab’s, unfortunately; it includes all assets, both its RIA share and those of retail investors on its on-line brokerage. (The retail sector makes up about two-thirds of overall assets, with institutional about one-third, the company has said.) TDA said it has brought on 260 breakaway brokers over the past three quarters, a 20-percent increase year over year. No asset figures related to the brokers were disclosed. Schwab did not disclose the number of breakaway brokers it recruited so far this year.

Both are benefiting from secular trends of brokers leaving wirehouses and broker/dealers to start their own RIAs, Tarkan says. “That’s driving a big percentage of net new assets for both these companies,” he said.

Net asset inflows to the big Wall Street wirehouse firms were quite a bit lower for the second quarter. Morgan Stanley’s global wealth management division, for instance, grabbed just $2.9 billion in net new assets for the quarter, while Merrill Lynch pulled in net flows of $700 million. (UBS hasn’t reported yet and Wells Fargo didn’t break this number out.) But Morgan Stanley CEO James Gorman said on a conference call Tuesday that that full service firms tend to have larger asset outflows in the second quarter than the pure play brokerages because of tax season. In the first quarter, Morgan reeled in net new assets of $11.4 billion, for example. Gorman also said that the quality of new assets is very important. “What really matters is net new annuitized money, versus transaction assets.”